A very wise man (a certain Mr Buffett) once said that your first aim in investing should be to avoid losing money — which is the exact opposite of what many people have in mind when they’re starting out.
What it means is to analyse the safety of your potential investments, minimise any possible downside, and only buy shares when they’re offering you good value. If you do that and focus on avoiding losses, you might be surprised by how the profits can take care of themselves.
In that light, I’m re-examining some of my favourite FTSE 100 companies, looking for reasons why not to buy them — those things that new investors really need to know. Today it’s pharmaceuticals giant AstraZeneca (LSE: AZN).
You might not see much immediate danger of losing money on a stock that has gained a mouthwatering 78% over the past five years, while rewarding its shareholders with dependable dividends along the way. But there’s a lot more to the AstraZeneca picture than that.
Declining profits is the big problem, and we’ve seen years of falling earnings per share now, and those dividends have been taking up increasing proportions of the company’s earnings. In fact, for the current year we can see a forecast yield of about 3.5%, but that would not be very well covered by earnings — and that’s an important thing for a company that needs to plough back a big chunk of earnings into research and development every year.
The problem has been long in the making, caused by the ending of some lucrative key drug patents and hot competition from generic alternatives. The current chief executive, Pascal Soriot, was brought in to try to turn the ride in 2012, and his actions were swift.
After dumping some non-core business and refocusing on long-term drugs development, the company today looks in significantly better shape. But when it comes to a return to growing earnings, we’ve seen a few false starts — forecasts suggesting 2015, maybe 2016, or perhaps 2017…
But the truth is, three years of flat earnings is all that has been achieved so far, and there’s an EPS drop of more than 20% currently predicted for this year. A 12% rebound indicated for 2019 would recover some of that, but it’s hardly back to overall growth.
I regularly read the writings of my fellow Motley Fool writers, and I’ve been looking for bearish views on AstraZeneca from them — but it’s hard to find any negative thoughts at all. The closest is Peter Stephens, who has examined the contrast between the falling earnings of the past five years and the share price rise. But he still likes the outlook.
That outlook has been improving, with hardly a week going by without news of progress on the company’s many drug developments. The latest was Thursday, after the firm received European Commission approval for a new formulation of one of its type-2 diabetes treatments.
Other successes in the same month include Japanese approval for a cancer treatment, and an orphan drug designation for another cancer treatment in the US (which essentially assists in its evaluation and development).
On forward P/E multiples of around 20, AstraZeneca is not the bargain it once was, but I agree with Peter that it’s “cheap given its future prospects.“
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.